BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 150|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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THIRD READING
Bill No: SB 150
Author: Nguyen (R) and Huff (R)
Amended: 6/22/15
Vote: 21
SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/1/15
AYES: Hertzberg, Nguyen, Beall, Lara, Moorlach, Pavley
NO VOTE RECORDED: Hernandez
SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/27/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
SUBJECT: Personal Income Tax Law: exclusion: student loan
debt forgiveness
SOURCE: Author
DIGEST: This bill excludes from gross income loan amounts
discharged from a for-profit college when the borrower is unable
to complete a program of study.
ANALYSIS:
Existing Law:
1)Provides that "gross income" includes all income from whatever
source derived, including compensation for services, business
income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
2)Provides that debt that is forgiven or cancelled by a lender
is generally treated as income on a tax return, and
consequently is taxable.
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3)Provides that in the case of an individual, gross income does
not include any amount which would be included by reason of
discharge of any student debt if such discharge was pursuant
to a provision of such loan under which all or part of the
indebtedness of the individual would be discharged if the
individual worked for a certain period of time in certain
professions for any of a broad class of employers.
4)Excludes loan amounts repaid or canceled by the United States
Secretary of Education from gross income under state law.
This bill:
1)Provides an exclusion from California gross income for income
that would otherwise result from a forgiven student loan, as
defined, of an eligible individual.
2)Provides an individual would be an eligible individual for a
taxable year if any of the following apply during the taxable
year:
The individual is granted a discharge pursuant to the
agreement between ECMC Group, Inc., Zenith Education Group,
and the Consumer Financial Protection Bureau concerning the
purchase of certain assets of Corinthian Colleges, Inc.,
dated February 2, 2015;
The individual is granted a discharge pursuant to
Paragraph 23 of the William D. Ford Federal Direct Loan
Program Borrower's Rights and Responsibilities Statement
because of either of the following:
The individual could not complete a program of study
because the school closed; or
The individual successfully asserts that the school did
something wrong or failed to do something that it should
have done; or
The individual attended a Corinthian Colleges, Inc.,
school on or before May 1, 2015, is granted a discharge of
any student loan made in connection with attending that
school, and that discharge is not excludable from gross
income as a result of the reasons listed in 1 or 2, above.
Comments
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1)Author's statement. According to the author, "Following the
closure of 107 Corinthian College campuses, many former
students are now seeking a partial or full discharge of their
student loan debt. Unfortunately, if their debt is cancelled,
discharged, or forgiven, that debt may be subject to state
(and federal) income tax. To aid these students, Senate Bill
150 removes tax liability on forgiven federal loan debt for
students who choose to forgo the credits that they earned.
Nearly 13,000 California students are unable to complete their
degrees but are still being held responsible for the student
loan debt they incurred. These students have devoted time,
energy, and resources in an effort to improve both their
education and overall lives. Already victimized by the
closure of the college, they should not be forced to forgo the
credits they earned while also being subjected to tax debt.
SB 150 helps students whose educational career is in limbo
through no fault of their own to continue their education
without being penalized financially."
2)How did we get here? Founded in 1995, Corinthian's for-profit
colleges once included over 100 campuses across the country,
where over 100,000 students were enrolled. A bachelor's
degree from a Corinthian college could cost as much as
$75,000. The vast majority of the school's revenue came from
federal student loans, but federal loans are unable to cover
all of the tuition, so students often had to take out private
loans. The Consumer Financial Protection Bureau alleges that
Corinthian kept tuition high in order to force students to
borrow from the college at higher rates. The Corinthian loans
came with origination fees of 6% and interest rates of around
15%, as of 2011, much higher than the 3% and 7% interest on
federal student loans. Corinthian was a longtime target for
federal and state regulators, with a host of investigations
and lawsuits charging falsified placement rates, deceptive
marketing, and predatory recruiting, targeting the most
vulnerable low-income students.
Since last July, the Department of Education has forced the
company to close or sell off its locations over concerns about
its high interest loans and misleading employment statistics.
In February of this year, Corinthian announced that students
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would get $480 million in loan forgiveness under an agreement
with federal regulators. Under the agreement, Corinthian
would sell the majority of their campuses to the nonprofit
ECMC Group, and students who attended ECMC Group campuses saw
an immediate 40% reduction in the amount they owed on their
private loans provided by Corinthian. The Department of
Education also fined Corinthian $30 million for 947
representations of placement rates, findings that Corinthian
disputed. Corinthian did not sell its Heald College campuses,
located mostly in California, and they remained open until
April 25, when they closed on a day's notice, leaving 16,000
students unable to complete their degree.
Under federal law, students have a right to debt relief if
they were enrolled at the time their college closed, or up to
120 days before the shutdown. The Department of Education
extended that eligibility window for Heald students, allowing
them to have their debts discharged if they withdrew any time
after June 2014, when the department and Corinthian agreed to
the sell the colleges. The Department of Education estimates
that about 40,000 Heald students would be eligible for $544
million in debt relief if every student sought relief. In the
past, only 6 percent of students whose colleges closed asked
for their debt to be discharged. The Department of Education
also estimates that if all 350,000 former Corinthian students
over the last five years applied for and received the debt
relief, that cost alone could be as much as $3.5 billion.
3)Reverse conformity. California law does not automatically
conform to changes to federal tax law, except under specified
circumstances. Instead, the Legislature must affirmatively
conform to federal changes. Generally, when the federal
government changes its tax laws, California catches up by
enacting its own legislation the following year to reduce
differences between the two codes, thereby easing the tax
preparation burden on taxpayers, tax preparers, and the
Franchise Tax Board. Currently, loans forgiven prior to the
completion of a loan repayment program are included as taxable
income under state law. If SB 150 becomes law, taxpayers
would exclude from income the forgiven loan for state tax
purposes, but include it for federal tax purposes, bringing
California further out of compliance with federal law.
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FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee, the Franchise
Tax Board (FTB) estimates that the bill would result in General
Fund revenue losses of $34 million in 2015-16, and $100,000 in
both 2016-17 and 2017-18. The bill would not significantly
impact the department's costs.
SUPPORT: (Verified8/27/15)
California Community Colleges Chancellor's Office
State Board of Equalization Vice Chair, George Runner
OPPOSITION: (Verified8/27/15)
None received
ARGUMENTS IN SUPPORT: The supporters of this bill argue that
this bill will protect students who would incur a financial
hardship from having to pay taxes on phantom income earned as a
result of student loan debt forgiveness. Also, supporters argue
this bill will help California students affected by the massive
closure of Corinthian Colleges by granting relief on the state
portion of their tax obligation.
Prepared by:Myriam Bouaziz / GOV. & F. / (916) 651-4119
8/31/15 17:00:56
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